Brandywine Realty Trust (BDN) 2002 Q2 法說會逐字稿

Good day, Ladies and gentlemen, and welcome to the Brandywine Realty Trust second quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like on introduce your host for today's conference, Mr. Gerry Sweeney. Mr. Sweeney, you may begin.

Karen, thank you very much. And thank you all for joining us for today's call to review our second quarter results and for an update on our business plan. Prior to getting started, let me read the following disclaimer statement. The information to be discussed on this earnings conference call may contain forward looking statements within the meaning of the private securities litigation reform act of 1995. All to we believe the expectations reflected in such forward looking statements are based on reasonable assumptions, these statements are not guarantees of results and no assurances can be given that the expected results will be delivered.

Such forward-looking statements and all other statements that are made on this earnings conference call that are not historical facts or subject to certain risks, trends or uncertainties that could cause actual results to differ materially from those expected. Among these risks are those we have identified in our annual report on Form 10-K for the year-ended December 31st, 2001 and any subsequent filings, a copy of which are all on file with the Securities and Exchange Commission. For further information on facts that could impact us, please reference our additional filings with the S.E.C.. We are subject to the reporting requirements of securities and change commission and undertake no responsibility to update or supplement information discussed on this conference call.

That being said, today's agenda will provide in addition to our second quarter earnings discussion a review of market conditions and a business plan update. Participating in today's call with me are Jeff DeVuono, our Senior Vice President of Operations, George Sowe, Senior Vice President of Investments, Brad Harris, our Chief Accounting Officer and Dan Palazzo, our Corporate Controller and Head of Financial Reporting. Generally there's not a great need to spend a lot of time on overall economic conditions. You're all well-versed on those points. And frankly, my guess on prospective economic conditions are no better and probably no worse than anybody else.

What we can tell you is that the real estate market conditions remain challenging and that there has not been a significant change in those conditions since our first quarter earnings call. As I am sure you've heard on other calls, while indicators are pointing towards favorable economic conditions, we have yet to see that translated into our business. Our customer base; that is, corporate America, remains frozen in the decision-making processes and extraordinarily reluctant to make any additional capital investments.

In fact, capital investment levels nationally remain at very low levels. Since leases are clearly a capital commitment, it's no surprise that it's still taking longer to get significant decisions made. Some anecdotal evidence might be helpful. During the last quarter we had two fairly large lease commitments that were fully approved and endorsed by tenant operating heads. When that decision, however, reached the very senior levels of those companies, they were delayed until after the 1st of the year primarily due to the CEO's lack of desire to commit the business to additional capital. It's certainly encouraging that the operational need still exists and we are still seeing adequate activity level. It is not encouraging, however, that these key decision makers remain reluctant to pursue long-term planning requirements. Certainly equity market volatility has exacerbated this problem.

Some of you may have seen "business week" a few issues ago had an article on the impact of stock prices on corporate capital investment strategies. To sum up that article, it's very hard for senior management in a public company to think about space requirements, or for that matter, any capital commitment when they are losing significant market value due to stock price volatility. Bottom line of all this is that the reluctance to make a capital investment continues to plague our sector. From a more local standpoint, the bureau of labor statistics recently indicated the Philadelphia region lost 13,200 jobs. While the 13,200 job loss is not positive, it represents just six-tenths of one percent of the region's employment base.

That data also indicates that this region significantly outperformed other regions of the country like San Jose, with almost an 8% loss, Seattle with a 3% loss, and Boston, which was up in that range, also. So, the region from an economic standpoint seems to have some level of stability. From a real estate perspective, vacancies appear to have stabilized, activity levels remain adequate. But translating that into actual leases remains problematic. As Jeff will talk about, some markets have clearly seen a plateauing of rents. In selected sub markets and transactions we are clearly in a declining rent environment with some increased concession packages.

Generally, though, we remain at that awkward inflection point where price is not the key driver in determining or accelerating a decision process and or changing a tenant's size requirement. We continue to maintain an extraordinarily aggressive marketing stance. I'm very pleased with the level of lease that we did during the past quarter. We renewed leases for close to 1 million square feet and signed leases for over 200,000 square feet, a very good quarter for us in that regard. We also generated a 7.2% cash increase on renewals and almost 5% on new leases. Still very positive indicators. You'll also notice that our 51-cent per share CAD number is high based on our last couple quarters. But that's primarily been driven to the significant volume of some capital commitments for for both leasing and general building improvements.

One of the key bench marks that we look at is what our capital costs are on a per square foot basis. During the second quarter of '02, we committed to an average cost per square foot, both in terms of improvements and leasing commissions of $5.94 per square foot. That breaks down to about $11.50 a foot for new leases, $3.60 for renewals and $6.90 for expansions. For the first quarter, though, that overall number was $4.32. So, you can see that this quarter we're up over where we were the first quarter. But to give it a frame of reference, for the third quarter of '01, we were at $6.78 in overall costs. So, while this quarter is marginally up from the first quarter of '01, it's very much in line with our historical run rates and is not anywhere near the levels that are creating any concern on our parts. This quarter results we believe are clearly more idiosyncratic to specific transactions as opposed to any major trends developing.

Some other key operating benchmarks, the occupancy levels remain around 91%, right with our expectations. Overall leasing percentage is close to 92%, which we think reflects some of our aggressive preleasing practices. From a financial reporting stand point, the second quarter again was a good one. We exceeded first call concensus buying per share, primarily driven by anticipated performance in our core portfolio, as well as some others which Brad will outline.

Another success story during the quarter was our retention rate remaining above our 75% bench mark. Year to date were approximately 78%, which we think speaks very well to the quality of our product as well as the skills and, frankly, the enthusiasm even in these difficult times of our leasing and property management teams. We also obtained $100 million unsecured term loan from existing members of our bank group. This is part of our ongoing program to maintain a high level of financial flexibility. Our team has also done a wonderful job of reducing our accounts receivable from the beginning of the year. It's a tremendous accomplishment. And as we've talked about before, as a company we're always very concerned about tenant credit situations. In fact, due to tenant bankruptcies during the last four quarters, we have lost almost 200 basis points of occupancy. That's a key statistic.

Bankruptcies such as Vlasik, DeLions Insurance and Comdisco have impacted our occupancy levels at a time when it's been very difficult to identify replacement tenants. Areas this quarter where we are frankly a bit disappointed are while our overall portfolio occupancy remains right in line with our target, our Richmond portfolio, primarily due to Main Street Center, remains at 86%. This is in line with market conditions but is nowhere near where we want it to be, so we still have some work to do in the upcoming quarter. It is also a bit disappointing that we were not able to achieve more levels of leasing on our three development projects. In particular, 400 Berwyn Park, while having some moderate leasing activity, still remains a bit behind hoped for goals. In the grand scheme of things, however, these projects are 41% preleased, represent less than 1.6% of our portfolio.

However, give than the rental rate environment and slow reaction times of tenants, you'll notice in our supplemental package we have delayed the stabilization dates on some of these properties and have moved the expected yields to a still very healthy 11.8%. George will summarize our investment activity. But suffice to say we are pleased with our sales pace this year. It's a bit ahead of schedule. And as we're having some difficult in identifying quality acquisition candidates, this disposition acceleration will have an impact on our financial projections for the balance of the year. And I'll speak to that issue towards the end of call. To summarize, general market conditions remain challenging. We believe we have seen a stabilization in the vacancy levels as well as the amount of subleased space coming to the market. Indicators, however, are still very mixed. And our financial outlook is clearly being driven by an overabundance of caution.

The major issue right now appears to be getting tenants to actually execute leases. Rental rate pressure continues, but it's in line with our expectations. Our marketing stance remains extraordinarily aggressive. We continue to get very good traction through our existing portfolio as evidenced by our lease growth and retention rates. Expenses are under control. And we continue to focus on improving occupancy levels, controlling capital costs and further streamlining our operations. With that brief overview, Brad Harris, our Chief Accounting Officer, will review our financial results.

Thank you, Gerry. Let's first talk about FFO. FFO for the second quarter 2002 increased to 31.6 million, or 67 cents per share as compared to 31.7 million or 67 cents per share for the second quarter of 2001. This 67 cents per share for the quarter exceeded first call consensus estimates of 66 cents by a penny. Better than expected results are attributable primarily to other income, which includes unanticipated termination fees and other nonrecurring items which total 1.7 million and to lower than expected interest expense due to continuing low interest rates. These results attributable to property operations are in line with our expectations.

Next I'd like to talk about EPS. Earnings per share were 26 cents for the quarter as compared to 11 cents per share for the second quarter of 2001. Net income increased to 12.8 million for the second quarter as compared to 7.4 million for the second quarter of last year. an Increase of 5.4 million, or 15 cents per share. The increase was primarily due to a decrease in depreciation and amortization expense of 2.8 million, or 8 cents per share an increase in rental revenue of 3.1 million, or 8 cents per share, and the write-off of unamortized financing cost primarily related to the company's refinancing of its revolving line of credit in the second quarter of 2001. And that was 1.1 million, or three cents per share. These amounts were offset by a decrease in income from discontinued operations, including a net gain on the disposition that's also included in that discontinued operations line of 1.4 million, or 4 cents per share.

As we discussed on the first quarter conference call, prior to 2001 all buildings were depreciated over 25 years. In 2001 the company started depreciating newly-acquired buildings over 40 years. And in the first quarter of 2002 we challenged the remaining useful lives assigned to the rest of our properties and where appropriate changed the estimated useful life from 20 to 40 years' affective January 1st of this year. Moving on to CAD, cash available for distribution for the quarter totalled 23.9 million, or 51 cents per share as compared to 27.7 million, or 58 cents per share, for the second quarter of last year. Our FFO and CAD payout ratios for the quarter were 65.6% and 86.8%.

The increase in our CAD ratios was due to our second generation capital expenditures, including building and tenant improvements and leasing commissions during this quarter. FFO and CAD payout ratios year to date were 65.1% and 81%, which are in line with our company target ratios of 65% for FFO and 80% for CAD. Now I'd like to address our same store results and leasing statistics. Same store NOI decreased by 1.6% on a cash basis and 2.3% on a GAAP basis for the quarter. The decrease in same store NOI is attributable to a decrease in occupancy. Same store occupancy was 90.8% in the current quarter as compared to 94.6% in the same quarter of last year.

The decrease in same store NOI for the quarter was consistent with our expectations and the guidance that we have been providing. We also calculated same store NOI on an occupancy consistent basis. If occupancy was the same in both periods, our same store NOI would have increased by 2.5% on a cash basis and 1.8% on a GAAP basis. What this tells us is that other than occupancy, revenue growth and expense controls remain solid. Current occupancy for the entire portfolio is 91% as compared to 91.2% in the prior quarter and 94.6% in the second quarter of 2001. Our attention rate is 75.8% for the quarter, which is ahead of our 75% target and ahead of last year's rate of 73.7%.

During the quarter we renewed leases with an increase in net effective rents of 7.2% on a cash basis and 9.9% on a GAAP basis. For new leases, net effective rent increased by 4.9% on a cash basis and 10.1% on a GAAP basis. Capital requirements on new leases averaged 1.54 cents per square foot while capital on renewals averaged $3.63 per square foot. The average term of these leases was 4.3 years. Approximately 93% of the leases signed during the quarter with terms greater than one year contained contractual rental rate increases.

We continue to focus our leasing efforts on doing more direct deals. Of the leases signed during the quarter, 63% were direct deals based on the number of deals, and 40% were direct deals based on square footage. We're well ahead of our target on the number of deals basis and right on our target of 40% based on square footage. Our return on investment capital adjusted for nonincome producing assets was 10.24% for the second quarter of 2002. Return on investigated capital is calculated by dividing net operating income for the trailing four quarters; that is, revenue minus property, operating and general administrative expenses by the five quarter average of operating properties at cost.

Next I would like to discuss some specifics about our financial statements. First let's look at other income. Other income, including continuing and discontinued operations, totalled 3 million for the quarter as compared to 2.1 million in the second quarter of 2001. As we have discussed in prior quarters, typically about one third of our other income, while recurring in nature is uncertain, such as leasing commissions, termination fees and other settlements. This type of income can fluctuate significantly from quarter to quarter. We had more income from these other sources this quarter than we did in the same quarter of the prior year. Lease termination and other nonrecurring items total 1.7 billion in this quarter as compared to 900,000 in the second quarter of 2001.

Next I'd like to cover indebtedness. Our debt count decreased by 8.7 million compared to December 31st, 2001. Our debt to market capitalization is 45.1% and the leverage ratio under our credit facility is 48.2%, which is right in line with our target of 45 to 50%. Our floating rate debt balance at the end of the quarter was 281.5 million, or about 14.6% of total assets. None of our debt matures in 2002, so we really have no short-term exposure. Next I'd like to spend a minute on accounts receivable. Market conditions continue to increase everyone's exposure to credit risk. Our collections program, however, continues to achieve significant results. Accounts receivable of reserves for doubtful accounts are down 52% from year ends.

Our collection program tracks tends on specific accounts very closely and provides reserves on these specific accounts in addition to our normal monthly provision. During this quarter we provided 700,000, or 1.4 cents per share in additional reserves. Our allowance for doubtful accounts totals 5.4 million as of June 30th, and the reserve 15.7% of our total accounts receivable and 1.8% of our annual revenues. We believe our current level of reserves adequately address existing credit risk, and we will evaluate our reserve levels on a continuing basis. We expect increased credit risk to continue to be an issue for the foreseeable future. We intend to maintain increased levels of reserves throughout the remainder of 2002 and to budget similar levels for 2003.

Although our historical loss rate is very low, averaging .35% over the past two years, we believe our strategy to increase reserves remains prudent given the current market conditions. We will continue our programs to early identify troubled accounts and maintain our increased collection efforts. In conclusion, let's talk about the remainder of 2002. While estimates for the balance of the year are being revised and the reins tightened, we remain encouraged by what we see.

Although occupancy has declined, rental rates are still posting increases. Expenses and capital spending remain well controlled and deals are getting done. The company continues to perform well despite current economic conditions. Gerry will discuss the rationale, but we are revising our FFO range to $2.68 to $2.70 for the year and estimate FFO for the third quarter to be in the range of 65 to 66 cents. Earnings per share is estimated to be 30 to 31 cents for the next quarter and $1.46 to $1.49 per share for the year before gains or losses on property dispositions. With that I'll now turn it back over to Gerry.

Thank you, Brad. While certainly past performance and I think our strong market position gives us some strength and comfort, I think the real issue we face is how we mitigate risk in what's clearly going to be a slower operating environment for at least the next four quarters. Our business plan financial projections fundamentally anticipate continued lag time in decision-making, marginal, if any, net absorption, essentially flat occupancy levels and flat to declining rent levels. Our tenant service platform continues, however, to expand its success. E-tenants is currently being used by all of our tenants. And as remarkable as it sounds, almost 50% of our work orders are now coming in from our E-tenants facilities management tool. That has resulted in a much faster level of tenants response and increased efficiencies. We're also undergoing a process now to upgrade that platform to further improve the operating efficiencies between our maintenance workers and the tenant service reps. At this point let me turn the call over to Jeff, who will walk you through some additional background on market conditions and our operational status.

Thanks, Gerry. The key points I'll touch on today are, one, the general state of the market, meaning what's going on with vacancy rates, new construction, rental rates, the local economy, demand for office space and just general trends. Conditions remain difficult for all the economic reasons Gerry's touched on. The real question is what's going to best get us through these times? And from my perspective, it's the location of our properties, our concentration in certain key markets, the quality and condition of our assets, along with the people, effort and focus we have.

Brandywine finds itself along with the region continuing to hold its own. I mean that from the perspective that the region, as Gerry touched on, is holding up reasonably well compared to other parts of the country and that Brandywine continues to maintain good occupancy levels and deal terms. The vacancy rate for the region, including Southern New Jersey, for the first quarter '02 was 13.6%. It appears this figure grew only slightly higher this quarter to 13.9. There's still a fair amount of sublet space on the market, however the majority of it is located in [King of Prussia], Carter and Southern Chester County.

However, as I reported during the last call, sublet space saw some healthy activity. Sunguard, rubber made, each of those companies took down approximately 100,000 square feet each, all of which was new growth. As a result sublet space for the combined region showed a modest increase of only 30 basis points. Tenants still prefer to do direct deals and much of the remaining sublet space on the market is incumbered. For those reasons we don't expect the majority of the remaining sublet space to be strong competition for future deals. But it will still cause negative pressure on rental rates and terms. Speculative construction starts are virtually nonexistent with the exception of two properties, 300 four falls, 290,000 square feet and 70,000 square feet respectively. The first one in the market is not anticipated to be delivered until early '04. The other one is located in an outlying submarket and will not have a material impact on any of the key submarkets in the region.

More importantly, approximately 700,000 square feet and about a million and a half square feet of recently completed projects has yet to be absorbed. Each of these properties does have deals that they're evaluating, but the depth of the prospects is certainly not what anyone would like it to be. Another interesting change worth noting is that three proposed office development sites totalling about a million and a half square feet are pursuing approvals for either retail or multi-family use. We're not sure you'll or many other events like this going forward, but it's clearly worth pointing out. All that said, it's also important to point out that the figures I just reviewed in the context of an overall market are somewhere in the 55 to 60 million square foot range, and just as important a region in as broad-based economy as we have. The demand for office space as expected remains sluggish. Again, there's no secret as to why.

As Gerry indicated, it's simply tied to two key factors, job growth and the fact that corporations will not, given the option, make capital decisions like signing a lease if they don't have to. Summertime is historically a slow periods for decision-making. It may be a contributing factor somewhat to the inability to get decisions made, but it's not the driver. It seems to be concern over the capital markets impact is. And going forward, we would expect to see modest declines in vacancies and other real estate-related statistics if the general economic health of the country does not improve.

The overall number of prospects who visit our spaces has in fact increased based on same store comparison for the same period last year. However, we view a good portion of the increased foot traffic as companies who are simply getting better educated on the market. This is good, though, as it -- it is a great opportunity for us to present ourselves. And at some point in time when they are ready to make a decision, improve our position. The slower spots for deal flow are located in King of Prussia, 202 Carter and [Conshock] submarkets. The markets continue with a slow but steady flow of business are located in Southern New Jersey, Plymouth, [INAUDIBLE], and certain sections of Southern Chester County

At this time we'd expect to see a continuation of owners getting aggressive for deals and expansions of concessions currently being offered. But we don't anticipate any major changes. As a result, we'd expect rental rates to drop slightly overall, but heavily 10 to 20% in certain submarkets. We may see slightly more free rent and increased commission structure. However, the majority of the changes will be related to an increased TI package and the assumption of existing lease obligations. We do, however, believe this is a short-term issue and we'll see a return to normalcy sometime during late '03, early to mid '04, assuming all goes well with the general economy.

Despite the market conditions, we continue to make the best of the environment and maximize the value of the situation and deliver positive results. The occupancy rate for Brandywine's portfolio in our core markets finished up just shy of 92% at 91.5 and increases slightly to 91.7 when the add in the Delaware and Lehigh Valley properties. The tenant retention figures for the overall company were very impressive, 78.4% year to date. The Pennsylvania and Delaware properties came in slightly above that at 79.1, while the Southern New Jersey properties reached 82.2%. Rental rates for leases renewed in the PA portfolio increased an average of 9% calculation of earning leases shared an increase of 4.9%. Renewal rates for the Southern New Jersey portfolio increased 3%. But more importantly, increased an impressive 11.4% for new leases. Of the space in our core markets that was originally scheduled to roll in 2002, approximately 56% or 1.3 million of the 2.2 million square feet has been renewed. Of the remaining leases 22% is deemed likely to renew, meaning the business terms are agreed to.

Looking forward into 2003, of the approximately 2.2 million square feet originally set to roll throughout the company, approximately 13.6% has already been renewed in '02. That said, there's no one's shoes I'd rather be in in our markets than ours. Our portfolio touches every one of the major markets in the region, and more importantly, is more heavily weighted in the areas considered to be the premier markets with the best long-term viability. Looking even closer into the portfolio, our buildings typically represent the higher end locations and the levels of quality within these submarkets. But just as important, we have great people leasing and managing our properties. Everyone of them has a clear objective and is empowered to make the decisions needed to achieve them. Our focus going forward is tenant retention, seeing every deal on the markets and making the best credit decision available.

Let me turn it over to George. He'll talk about the investment market and update you on our investment activity year to date.

Thank you, Gerry. We're pleased to report that we've already exceeded our full year 2002 projected 100 million in acquisitions and 150 million in disposition activity with the transactions were recently completed. As of the end of the second quarter we have achieved gross property sales of 169 million, consisting of nearly 2 million square feet with an average increase the capitalization rate of 9.1%. These properties were sold at nearly $8.6 million gain. Specifically for the second quarter we sold 51 million of properties at an in place capitalization rate of 8.5% and a budget to capitalization rate of 8.2 percent. We anticipate total dispositions for 2002 to total 190 to 200 million dollars.

We have a single asset remaining in Long Island that we're going to reposition from an industrial building to an office about to maximize its value. We anticipate this will take approximately six to 12 months but should result in much higher net sales proceeds. Year to date we have acquired 106 million, totaling 725,000 square feet with an average in place capitalization rate of 10.5% and a budgeted capitalization rate of 10.9%. For the second quarter we acquired an office building in Richmond, Virginia 13.8 million at a 12.4% in place budget and capitalization rate. The 113,000 square foot six-story office building is a great compliment to our existing Richmond portfolio, an excellent example of our investment strategy.

We competed for the building against public and private buyers and understand from the selling broker that we were not the highest bidder for the property, but we were deemed to be the best bidder for the property based on our reputation and ability to execute. This is exactly where we want to be positioned as a prospective buyer. Another acquisition that closed just past the conclusion of the second quarter involved our acquiring our partner's interest in an entity that owned two 100% leased office buildings in Newark, Delaware totaling 220,000 square feet. We anticipate total acquisitions for 2002 will be 110 to 135 million. We currently have a building under firm agreement of sale and and we're scheduled to close shortly. We hope to close on at least one other property prior to year-end.

The properties we're acquiring as well as the others for which we're negotiating are in our core markets and should be great addition to our portfolio. There continues to be a dichotomy in the real estate investment climate. But investor demand remains high for high quality, well-located buildings. At the same time, uncertainty regarding any tenant's creditworthiness, weak economic fundamentals and reduced user demand for office space tend to put upward pressure on price. However, we continue to find in-market opportunities based on our relationships, presence and knowledge of our markets together with our focus and concentration on our business platform. Gerry?

Thanks, Stewart. Let's take a few moments and talk about some of the elements that we're focusing on in terms of mitigating our risk. Both Jeff and Brad touched on the rollover and our credit. I think from a risk management standpoint we're very much on top of our existing portfolio. In addition, as Jeff did indicate, our leasing team really is looking forward, and we are well into our discussions with numerous tenants who have rollovers occurring in 2003. So, I feel like we're focusing on the current rollover, the existing vacancies, but also starting to look a little bit forward to try and create a catalyst for tenants to renew early.

The second issue relates to our development pipeline. Our total unleased space in the development pipeline is very small in terms of our overall portfolio. We continue to aggressively pursue those deals. I don't believe that the leasing status in our development projects sends any market signals other than what we've already discussed. We have certainly presented a very high quality product to the market. We have a solid leasing team working on the buildings and are aggressively pursuing all leads. I think what it does do is it amplifies what you would expect, is that tenants simply have more alternatives.

In addition, there's also a general negative psychology in the market, which frankly takes away the impetus for tenants to accelerate their decision-making process, creates a slow pace of leasing. Particularly, I think, we're seeing on the newer, more upscale product. Our hope is to be clearly in a position to successfully conclude some of the negotiations we have underway to improve that preleasing percentage. But I think in the interim, you should look at the situation in the context we do and combine our development pipeline activity with the overall success we're having at the operating level.

We're also very pleased with the progress we're making in our strategic plan. We continue, as George touched on, to pursue opportunities that will consolidate our market position and we're currently analyzing a number of transactions. Those opportunities, however, are taking longer. We are seeing declining pressure on cap rates leading to value increases, and we remain extraordinarily careful in identifying what acquisition opportunities, if any, fit our capital allocation program this year. Several other items. We continue to have good success in expanding our development services program.

We have recently been retained by a large municipality here in the Philadelphia suburban region to serve as their development consultant on an overall redevelopment program. I think that kind of reflects the continued evidence of the reputational advantages we enjoy in these markets. Regarding Cirra Center, which is the land option we have on a property at 30th street station in Philadelphia, our marketing efforts are gearing up. We will be opening up or marketing center within the next several weeks. That center will be located at 30th street station. We have met with numerous tenant prospects, brokerage firms, civic agencies to presents the project. I will tell you that the response thusfar has been exceptionally strong, and we're encouraged. Long way to go.

Our design development process is moving forward. And our front money expenditures remain very much on target with what we anticipated and in line with our suburban development projects. A follow-up on Brad's comment on earnings, as we indicate in our press release, we had previously provided a low ends of our guidance range of $2.72 with a broader range. First call consensus on the company now is $2.75 per share for '02. Based on some [INAUDIBLE] occurring due to the acceleration of our sales program, the continued slow leasing environments, the uncertain acquisition pace for the remainder of the year, and quite frankly, our very strong bias to be cautious due to general economic and credit uncertainty, we are now projecting 2002 FFO between $2.68 and $2.70 per share. For the third quarter we're projecting a range of between 65 to 66 cents a share and 68 to 70 cents for the fourth quarter.

Right now, given the general economic uncertainty, we hope to be in a position to identify a 2000 estimate range during our third quarter earnings call. Several final comments. Due to the significant pullback in the RMS as well as our stock price in the last several trading weeks, I want to remind you that we have historically been a very active repurchaser of our stock. As indicated in our supplemental package, while we did not buy any stock during the second quarter, we do have existing authorization to repurchase an additional 1.3 million shares.

Also, even with the real estate fundamentals remaining challenging, real estate capital conditions are such that we see downward pressure on cap rates, obviously leading to an overall increase in valuation. For example, at our current trading value, our suburban office portfolio currently has a public market capitalized value of about $122 per square foot. By way of comparison, sales of comparable products are occurring between 160 and 220 per square foot. We certainly believe in the intrinsic value of our real estate holdings and that they're firm and that we anticipate given continued disruption in our stock price, we would again be an active purchaser of our stock.

We are also close to finalizing our long-term executive compensation program. And to the extent that options are issued as part of that program, would expect to have those expensed into our income projections using a black show valuation model. So, to sum it up, marketing conditions remain challenging. But our market position is strong. Our management team is very much focused. Our core portfolio performance is on target, and we are actively pursuing numerous acquisition development opportunities that will fit our capital allocation parameters. So, fundamentally, we are very confident that we have weathered the storm, at least thusfar in good shape. And absent another economic armageddon, we believe that real estate market conditions will slowly improve from this point forward. It will be a slow process, but we are confident that our market position, product quality, the enthusiasm and passion of our operating and leasing teams will continue to perform well and build on our franchise value. Karen, at this point we'd like to open the floor up for questions. And thank you all for participating in the call.

Thank you. If you have a question at this time, please press the 1 key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question, press the 1 key. Our first question is from Stewart Sealey.

Good afternoon. Brad, I'd like to follow up on your comments on the credit loss and just get a better sense for how to interpret that. I guess, if I hear you correctly, you're just reserving 700,000 a quarter which is about 10 basis points of revenue and you have acreeted up to about five and a half million dollars in total?

We provided 700,000 during this quarter, and we are up to 5.4 million in total, that's correct.

And 700 is about the amount you expect to provide as additional reserves going forward, as well?

I think the 700,000 is probably a little higher than we would be doing on a regular run rate. But just given certain particular market conditions right now and our -- like we say, we're closely watching specific tenants and that type of thing. We thought it would be appropriate to put 700 up this quarter. That is higher than what we'd expect our quarterly run rate to be.

And can you sort of discuss the reserve amount that you've taken so far and what your true credit loss has been?

This year in total we've provided -- I'm just confirming these numbers now -- 1.1 million for the quarter year to date. And our actual write-offs for the year have only been 258,000.

Do you think you're being prudently -- you know, do you think you're taking a -- just an overly conservative posture on this?

I don't believe so. I think what we have is a -- by conservative, I think it's appropriate. You've got to keep in mind that a big portion of that reserve also relates to our straight line rent position. We keep a -- we have about $2 million allocated to our straight line rent balance. That balance gross is about 27.2 million, of which we have a reserve close to 2 million related to that. The other -- the balance of the reserve relates to tenant receivables, and that's about 3.5 million. And while we certainly think it's adequate, I would not suggest that it is overreserved.

Stewart, if I might amplify Brad's comment, I think we've -- you know, certainly we've given clear direction to the financial team to be -- if they're going to err, err on the side of being conservative in this kind of climate. We've always focused on credit to the extent you can in our business. Credit check, bank references. We've certainly -- as we've been saying for years, we're clearly a secondary credit business. There has been a fallout. There's been a change in the economic climate. So, my clear direction to these guys has been to be cautious in establishing reserves. It clearly affects our growth rate.

But I do think in light of the uncertainty and what we've seen thusfar, not just in our company but throughout the entire office sector in terms of certain tenants who, you know, up to a certain point in time are performing well and all of a sudden overnight they become a financial catastrophe, that does affect these companies. And it's certainly affected us, as I indicated during the past year with some fairly high-profile names. When we did those lease transactions, the companies were very well capitalized, doing very well, great business plans, and within a year they're essentially bankrupt. I'm not sure how you can be too conservative in today's world given all the uncertainty of what we've been witnessing over the last few quarters.

Thanks for the clarification. Gerry, could you expand on George's comments with respect to the investment sales market? And I think Richmond is a good, you know, microcosm to look at, you know, given that your portfolio is in the eighties, the market is, you know, having a tough time, yet there are still people looking for assets. I mean, how are people bridging the bid-ask spread with occupancies where they are in the market?

I think one of the things we looked at relative to Richmond in terms of assessing allocating capital is, I mean, our portfolio down there is in that 86% range. a good piece of that is due to the very slow leaseup we've had at Main Street center, which is a building we own in downtown Richmond. That continues to plague us from an occupancy standpoint. There's been negative absorption in downtown Richmond for a number of quarters, certainly a couple big bank mergers have not helped that marketplace down there. But even if you take that out, we lost a tenant in our Dabney portfolio this year, which I think has created what we think is an abnormally low occupancy level in that portfolio. The team we have in Richmond has done a great job of getting ahead of renewals. We simply have just lost a major tenant this year that drove that occupancy down to those levels. From an investment standpoint, we frankly saw some pretty good pricing on some projects down there. George, do you want to speak to the specifics of acquisition we made down there?

Sure. As I mentioned, it's a 12.4% cap rate going in on the building. Great building. We purchased this from an international company that was looking at American real estate holdings. So, we saw it as a great opportunity. As I mentioned, we weren't the highest bidders for it, but some of the local -- the private players had to go out and get debt because it is a great capital market right now. And we did a quick, clean close. And that's what they're looking to do, certainty of close. And we were able to provide them with that certainty.

Certainty in Richmond is a little different from up here. The bid lists for properties down there are certainly not as long as we're seeing up here in the Philadelphia region. It seems as though a couple of the other major landlords in Richmond are very much in a hold strategy, not looking to improve their market positions. We saw that as a window to move quickly and get a couple things done. In this market up here, I mean, I think we're continuing to see pretty good bid lists for properties. There is -- I think the underwriting is more conservative for sure across the board, both by public companies, but also by the institutions. But I think there's a general expectation, particularly when people look at this marketplace here -- I can't speak to the rest of the country -- that the this equilibrium now is a short-term condition. Jeff touched on it a little bit in terms of, you know, we've essentially seen a shutdown in new construction, which I think is a good thing. The only building coming along that's competitive was already out of the ground when things started to turn. There's certainly some space to be absorbed. But if you assume that this region returns to its normal pace of leasing activity and net absorption levels that it's historically had, that space will be absorbed quickly. Approvals are getting much, much harder. And I think it was interesting to hear Jeff talk about a couple sites that changed from office to either retail or multi-family. So, I think that's a good thing. I think people are trying to reconcile the bid-ask spread between what the rent levels are in place, what they anticipate the short-term leaseup costs would be, including additional lag time and absorbing any vacant someplace. But I think the fundamental belief is that this market's going to do pretty well over time.

Just to sort of summarize that, what do you think the implications are for cap rates on your portfolio? I hear you saying that your market cap per square foot is about 120. Do you think the -- you think the comps are about 160. What do you think your NAVs what cap rates are appropriate, and where do you buy your stock? Thanks.

I don't want to go on too long about that story. That's why I said to summarize.

Of course not.

Well, let me answer you -- this is what I recall, actually. I think we're going to continue to see some downward pressure. We've been fortunate in moving ahead pretty quickly this year in getting about $100 million of acquisitions done. They've averaged over 10% cap rates going in. And when we factor in some leasing assumptions, which we're pretty much on target, we're in that mid 10 to high 10 range. We're going to be very, very cautious in looking at further acquisitions unless they have a special component to them. But I definitely see cap rates in this market place migrating down to the mid to low 9s for the premier quality assets. We do not publish a NAV on the company. You know, we certainly think the range of estimates out there on the street right now, the higher ends of that range is more reflective of what our internal estimates are, although our internal estimates vary from that. We're clearly a buyer of stock at these levels. I mean, the way we analyze it in today's kinds of environment, if we could buy a piece of real estate at an essentially 13% yield, which is what our FFO yield would be on a purchase, and at a significant discount replacement cost, we would do that real estate transaction every day. And we would fund it like we've always been funding our acquisition activities, by our asset sale program. So, I think we look at buying back our stock as a real estate plan. We look at the yield we get going in. We look at the discount to replacement cost. In other words, the price per square foot we're buying in on public market capitalization. We look at no marginal increase to capital cost, no marginal increase to administrative overhead, and we look at what the accretion is on a per share basis, on a NAD standpoint basis to the remaining shareholder basis.

Our next question is from Don Vendetti.

Gerry, it's Chris Haley. How are you?

Fine. How are you?

Fine thanks. George, congratulations on the sales. I was interested to hear that the cap on the $51 million of sales versus your budgeted 10 two. My recollection is you had actually budgeted the sales to happen this year, which is great, and the pricing is good, what did that translate to in terms of [INAUDIBLE] take 130 basis points again 51 million?

I'm sorry, Chris. I don't understand the question.

All right. You were budgeting a ten two cap rate on the sales, is that correct?

Right.

And they are at an eight five cap rate?

Yes. What that entails, though, Chris, that's what's in place versus what we budgeted for. So, in order to get to the budgeted numbers, there would be some TI and other capital to make some of those deals happen. So, I guess the distinguishing characteristic I'd see in the two would be what was actually occupied in place paying rent versus some items that would be assumed to be leased up, some of the spaces soon to be leased up going forward.

So, if I ask understand this correctly, when you say budgeted, you're not necessarily saying what you expected in the sell for?

Oh, no, I'm sorry. Actually, the budgeted NOI over the year versus what was actually in place. So, I guess we distinguish internally what's actually in place versus what was assumed to be there. And again, a lot of times with some TI, either brokerage improvements, et cetera.

So, you're saying is the way it will work out is your 51 million of sales in the second quarter will equate to about $5 million of NOI?

That's correct.

Okay. Not, you know, four or five or something like that, which would be the 8.5 cap rate?

That's correct.

Okay.

And again, that's assumed to have some leaseup of vacant space and some rental growth, et cetera.

Okay. I had a question on the EPS guidance for the full year. Is this EPS guidance adjusted for -- retroactively adjusting for the depreciation change that you made to the first quarter?

Yeah. It reflects the longer lines of depreciation, yes, it does.

And in the guidance is there any expectation for terming out your short-term debt?

No.

Okay.

Not -- Chris, not for the balance of this year. I mean, we have some hedges in place.

Right. That go out through I think the middle of next year, guys?

September of 2004. Or June 2004. It's through the existing term of the credit facility. Chris, it's a great question. We've gone back and forth on that because, I mean, the long-term rates are very good right now. We did a lot of longer term secured financing earlier this year in the -- in the fourth quarter of last year. Have not really done much this year. We opted to do a $100 million unsecured term piece that we closed a bit ago with members of our bank group.

Right.

That paid off some secured construction financings and then created some additional capacity under the line. What we're going through right now is an exercise of how much secured debt we want to take on 'cuz we've been a pretty active seller of properties. And I will tell you one of the biggest challenges we've had on the sale of a number of those properties has been getting the debt, the security debt either assigned, by fur indicated, assumed, but working through the different lenders to get the appraisals done. So, I think we're being very careful on exactly what we want to put secured debt on. If you recall, our program is to keep our floating rate debt equal to about 10% of our asset base. As Brad mentioned, we're what now?

About 14%.

That's primarily due to a $75 million swap that burned off a little bit ago, in April.

Right.

I mean, we're going to take a look at how we can manage our interest rate exposure by either a hedging strategy on some of the unsecured pieces or doing some smaller fixed rate longer term debt that's secured on some key axis that we are we'll identify.

Final question has to do with capital expenditures. The 16-cent reduction related to straight line rent and the below the line or capitalized leasing costs you had indicated is roughly in line with the historical averages. And I would differ just in terms of per share differences of 16 cents being a little bit higher than where you've been historically. I'd like to get some color on you on what you think your per share capital expenditures reduction might look like. Is this 16-cent difference between second quarter CAD and FFO a good run rate going forward?

No. I think as I tried to mention -- maybe I wasn't clear. We actually thought that the amount -- the CAD deduction for capital this quarter was a bit higher than our historical run rate. The reason for that is -- the reason for that is we had some costs this quarter that -- I guess we had about $800,000 of general building repairs, including a major overhaul of a complete HVAC system in one of our buildings where we're losing a tenant to get that building ready for occupancy. In addition on that, on the leasing commission side we had -- in about a million nine of leasing commissions we paid, we had almost 600,000 -- actually, it was a little bit higher than that -- that we paid relating to deals that were signed earlier this year. So, we reflect our CAD calculation on a cash spent basis. The numbers I was talking about earlier are on a committed basis. And that's what we really look at in terms of the cost for us to actually get leasing deals done.

Right.

And the 5.94 on average we looked at was a little bit higher than what we had in the first quarter but was frankly below what we did in the third quarter of last year. So, we don't really think that's reflective of a trend. Certainly not based on what we're seeing right now.

That's what I was trying to reconcile. You said it was down versus the third car '01, up marginally versus the first quarter. So, I figured maybe that was just the new run rate. All right. Thanks.

Yeah. You know, when you talk about the type of leasing we do, you really can have quarterly results skewed a little bit due to a particular transaction.

Should we expect to see your average lease term remaining expand six months from now going from your supplemental disclosure, then?

You mean the lease in terms of months?

Yes.

Well, we actually wound up for the first quarter about 3.7 was our weighted average lease term. This quarter we wound up at 4.31. So, if you look at it on a per lease year basis, first quarter we were about $1.20. This quarter we were about $1.40, which is right in line with where we were in the third quarter of '01.

A dollar and a quarter, a dollar and a half is a good run rate per annum?

It seems to be. If you take a look over the past five or six quarters, our total capital cost per lease year has ranged from a low of just slightly less than a dollar per square foot to a high of $1.40 a foot. And again, that's really driven by the composition of what's been new leases, what components' renewals and frankly what components' expansions, because sometimes the expansions have a blended rate that's a little bit high due to the recent configuration.

Our next question is from Louis Forbes.

Jeff discussed the potential for decreases in rents. You've had growth in rents on releasing. What do you see going forward in terms of your expected decline on market rents versus your expected in place rents on future leasing? Are we going to see actual rolldowns realized?

My reference to rents coming down in the marketplace were more to cover, Louie, the general market and the actual range reported by different firms, like Cushman Wakefield, those kind of entities. We've seen positive growth I think as a reflection of the old rental rates, which probably some of the deals were done in markets that are, quite frankly, much worse than they are today. So, I think there's still some upside on the portfolio in that regard. Where you're going to see some downward pressure on rents would be more on new development projects and properties like that, more the A properties.

Louie, we mark to market -- I mean, our mark to market right now is just north of 6%. Now, that's down from a trend line. It was averaging around, you know, 10 to 11%. But I kind of view that as illusionary. We've been forced thusfar, and our retention rates have held in there. We tend to get some very good rental rate increases from existing tenants because of what Jeff had mentioned, and also because of the fact that our average tenant size is between 4,500 and 9,000 feet, so you tend to have a dynamic with those tenants where they don't really want to go through the hassle of moving, so they're usually willing to pay a little bit of a premium to stay. Where we'll continue to see rental rate pressure are on the larger deals that are heavily tenant repped.

There's no urgency on when they have to occupy, and then it just becomes a pricing program to see which deal can get the transaction. Now, obviously factors such as quality of the building, the location, the tenant improvement allowance, things like that will be important, but also rental rate gets into the equation there. And I think where we've seen the biggest rental rate pressures on those types of deals, primarily in the King of Prussia, northern 202 corridor. I think we've been pretty pleased. We haven't seen a lot of rental rate pressure in some of the other submarkets.

No, it really is fragmented.

Okay. Good. That answers the question. Thank you. A couple minor questions on the balance sheet. There's a big increase in other assets during the quarter and a significant drop in tenant security deposits and deferred revenue. I wonder if you could highlight.

The other increase in the other assets is basically about 32 million [INAUDIBLE] There's nothing really nonrecurring or anything in nature. It's more just the timing of getting cash at the ends of month, June 30th as compared to December 30th, year ends.

Okay. I must confess I don't necessarily understand that answer. Tenant security deposits, that component would be something the tenants give you, and it would sit there until --

More rent side, Louis.

Okay. Thank you.

Our next question is from Michael Martin.

Good afternoon, gentlemen. Just quickly, when I look at the expiration schedule, you've got 5.2% of your portfolio rolling in the last two quarters. Typically in sort of a normalized market you probably would have negotiated the renewals three to six months in advance. Are you finding that those leases go right down to the last day of the lease before you get a deal done, or can you really sort of ballpark pretty well at this point how much of that you'll renew?

Every tenant's decision process is different. We try and get in ahead well before the three to six months that you mentioned. I think they're all the issues that Gerry touched on, which is just the difficulty in these different companies to come to a final decision. And you're going to continue to see that for the foreseeable future until things change in the general economic environment. Our discussions with these folks is -- if I had to make a broadbrush statement across the board, it's basically a hesitation on their behalf to make a decision and conflicting edicts and directions between the operating units and the corporate office. Like Gerry mentioned a couple of deals where the business operations were moving forward, and then when it got up to the CEO's desk, they put off anything they don't have to make a decision on at a particular point in time.

Okay. Thanks.

Thank you. Our next question is from Gary Boston.

Good afternoon. In terms of the Cap Ex, I want to get back to that in just a second, but more really on what the -- what the practices are in terms of vacancies and acquisitions, whether or not that is included in your -- in the Cap Ex that you used to adjust your -- to get your CAD and, you know, how much of your GNA and interesting is capitalize into the that dome the program?

Capitalized interest for the quarter was 720,000, which includes land owner development and buildings under construction. With regard to second generation, basically any development, we give it a 12-month window before we bring it into seconds generation. So, a property comes on-line, after 12 months those costs will be regarded as second generation.

Okay. Speaking of land, I just wanted to get your thoughts when is a left of the asset sales for the year might be land and also the potential for any additional land purchases in the second half of the year.

There's a huge small parcels of ground that we anticipate might be sold by end of the year -- might be sold by the end of the year.

They're either in some form of negotiation of possible options. But, a lot of them are smaller pieces of ground, Gary. For example, if we bought a project that had some excess land, a lot of times we don't even have a basis assigned to it. It's one of these things that we deem it just to be excess. And the buildings, frankly, are small. They're more either a development or construction company or a user that may want to put up its own building. Generally we don't have any large pieces of ground that we're looking to either acquire or dispose of at this point.

And I think in terms of land acquisitions, you mean, right now we have a pretty good-sized land bank, about 4 million square feet of that, of office space on the land. You know, a couple of those key parcels we control the option. So, we actually haven't brought that land onto our balance sheet until approvals are perfected or we have a tenant that we can move forward on. So, we think from a financial standpoint they've been structured the right way. All that being said, I think we are seeing some intriguing opportunities in the marketplace. I mean, certainly we always want to keep an eye on how difficult the market is today, but we just as importantly want to keep an eye on how we want to position ourselves in this market, both now and to the long-term. So, I would say that we're looking at a number of different opportunities, some of which involve a component or a parcel of ground that I'm sure we would structure very smartly from a financial standpoint but that would bring the development capacity within our control. So, we've always followed a process of cooperation of co-opting some of our potential competitors. And that may weaned up being a good opportunity for us over the next four or five quarters.

And just finally, in terms of the guidance for '02, could you just give us a sense on what the occupancy assumptions underlying that are and whether or not there's any, you know, buy back, stock buy back deal pinned to those numbers.

We did not program any buy back into the outcast. We have not programmed any additional acquisitions in the FFO forecast with the exception of the one transaction that is closing very shortly. And we've assumed that our occupancy -- our occupancy in the core portfolio assumptions really haven't changed. Probably a little bit below where we are in the third quarter, and would expect to come back in the fourth quarter somewhere in the 91 to 92% range. We had factored into our projections essentially about two and a half cents. Coming out of our development pipeline of unlease assets at the beginning of the year, that number has been pretty much cut in half. So, they're the key drivers in terms of what we're looking at for FFO for this year.

Great. I appreciate it. Thanks.

Our next question is from Ken Weinberg.

Hey, guys. Good afternoon. Just on terms of the rollover numbers that you're throwing out there, I guess, Jeff, you touched on that you thought that 22% of the remaining rollover for the rest of this year is expected to renew. I was wondering if you had, I guess, the other side of that in terms of tenants you already know of that are expected to vacate and just how that feeds in, I guess, to your retention assumptions going forward here.

Ken, we are -- we're gonna lose about 100,000 square foot tenant that we know of in the third quarter. Oh, 80,000?

Yeah.

Okay. 80,000 I'm sorry. And then we have one tenant whose lease expires in the third quarter who is probably going to stay in about 35% of their space and will downsize. The rest of them are a lot of small tenants we think we have a good chance of renewing. Jeff, you're looking at the detail.

Yeah. I think it's somewhere around -- other than those two deals, a small number. I'm still looking for it, Ken, of the tenants that will actually renew.

The longer they delay, the more likely they are to renew. Usually the nos you find out pretty early on. So, for this 80,000 square foot tenant and the one who is downsizing, we've pretty much known that, you know, from -- probably not the initial meeting we had with that tenant, but as events progressed, it became clear they weren't going to stay. We track everything by status codes. So, the ones that tends to be in the mid range of the status codes are usually the that wind up at the last minute deciding they were going to stay, unless there was a corporate decision to relocate out of the area or shut down the office.

They all think though can move very quickly, at the very last minute in the end and create leverage for themselves by stringing it out.

How about '03, any of the large ones that you already know about or are concerned about at this stage?

I'm sorry. In '03 did you say?

Yeah.

No. Actually, we had a couple of larger tenants early. We hopefully will have a much better hand on that as we move into the third and fourth quarter of this year.

Okay. Thank you.

Thank you. Ladies and gentlemen, once again, if you do have a question, please press the 1 key. We do have a follow-up from Don Sandetti.

It's Chris Haley again. I appreciate you going through the assumptions for the second half of the year, and particularly in light of the fact that you kept guidance unchanged for the first quarter, even though you beat the numbers pretty handily. Just working through some of our models, it would appear that other income would have to stay kind of up in the $2 million a quarter range for the remainder of the year. Is that fair?

To achieve the range that we provided. In that range, yes.

Okay. And on the '03 -- pardon me -- the push out, it looked like almost all the developments were pushed out some degree. When do you expect material contribution from these developments from a profitability perspective?

We did push everything back just about six months. I can't tell you it's scientific, Chris.

That's fine. So, then, is it '04?

We're expecting the latter half of '03 for that stuff to come on-line. We'll be bringing -- we partially release buildings based upon the occupancy during the first 12 months following core and shell completion. For 12 months you're kind of in a hybrid situation where you're capitalizing part of the building and expensing the part that's been released. 401 and 400 Berwyn Park come on board in the first quarter of '03. And 935 will come on-line in the third quarter of '03. So, we would expect that the benefit we'll get from them coming on-line will be in the third and fourth quarter of next year. I mean, we anticipate we have a couple transactions we're working on with both of those, 400 and 401 Berwyn. They probably won't hit until the second quarter of '03. And with 935 we'll have to see how the marketing events go. But we've taken a hard look at those assumptions and are prepared for both the upside and the downside as we look at '03.

And I want to hit on a comment that was made before. You expect a little bit of an occupancy pickup in the fourth quarter of this year. Is that based upon some leases that you've got out?

What I actually said, just to be clear, was that we expected the third quarter to trough down from where it is right now.

Okay. All right.

And in the fourth quarter to come back to the levels that we kind of closed out the second quarter.

Maybe I'd just like to hear from your perspective, Gerry, looking out, and no specific numbers are required, but what gives you confidence that you will see any material growth in '03 over '02? What gives you any confidence that you'll he see per share growth in '03?

Well, I think we're looking at it from a couple different standpoints. We do think that there's going to be a nice acquisition environment. I think we need to work harder and smarter to make sure that we identify the right opportunities. You know, we're fairly cautious people by nature, but also optimistic. I'm really looking at the -- I mean, give than the macro disruption in the real estate market that's driven by the economy, I'm looking at a 91% occupancy level that I've got to believe there's more upside on that than downside.

We are pushing really hard on all leasing fronts and all the sub markets to get transactions done and to reduce our level of vacant, you know, or space that we're carrying. Don't know for sure how that's all going to pan out, but we've had very good success looking at '03 on some of these major tenancies. We still think there's some imbedded growth in the existing portfolio. Even if, for example, we are unsuccessful in leasing any additional space in our existing development projects, for the entire year of '03 that will only cost us about 2 cents a share. So, even assuming there's not a lot of activity there at all, with he think that's a manageable downside for us for '03. We are spending a lot of time focusing on how we can run the company a little more effectively and efficiently, looking at all of our overhead costs and how we're doing each piece of our business. I can't say that's going to translate into cents per share at this point, but it's clearly an area of focus.

Right.

And we are pursuing a number of build to suit transactions that if some of those would happen or one of those would happen, they'd be looking at delivery sometime in the third or fourth quarter of next year.

I may have missed this Gerry, on the expensing options on the proposed cap regulations, what would the impact have been and what kind of numbers are we looking for into '02-03.

I'll explain it to you as I can. If we were to expense all the options we have, or, you the options we have on our books today, that would cost us I think about 1.4 cents a share. Now, you can't go back and retroactively expense options. So, what you're really looking at is what options we would issue going forward. We certainly would anticipate that having the impact of well less than a penny a share. And at this point I think the prevailing school of thought is we'd use a black Shoals valuation approach as opposed to the intrinsic value approach, if that answers your question.

Yeah. Thanks.

Mr. Sweeney, I'm showing no further questions.

Well, we certainly appreciate everyone's patience in listening to the call. I'm sorry we ran a little bit longer than we normally do, but we appreciate your participation and look forward to next quarter's call. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and you may disconnect at this time. Have a nice day.